Is Goldman Sachs right that 7 megatrends will dominate the global auto industry's future?

This week, Goldman Sachs's research team published a massive
note on the future of the global auto industry.

Really, it was a note on the future of human mobility. But are
these trends inevitable? Will they really transform the way we
get around?

Let's break it down.

Goldman's analysts, led by Kota Yuzawa and Patrick Archambault,
highlighted seven "megatrends." I've annotated them, but here
they are in total:

Endless powertrain
advancement

Autos on a severe
diet

Autonomous driving on
horizon

Power shift to mega
suppliers

New entrants afoot

Connected cars and shared
mobility

Shift to emerging
markets

And now the breakdown:

1. Endless powertrain advancement: Power
train electrification is essential to meeting fuel economy
regulations, and we expect the shift to hybrids (HVs), electric
vehicles (EVs), and fuel cell vehicles (FCVs) to continue.
Improvements to the internal combustion engine (ICE) also cannot
be ignored. We expect gasoline/diesel engine vehicles will still
make up 75% of global vehicle sales in 2025. Better engine
performance is essential to raising the fuel efficiency of HVs
and plug-in hybrids (PHVs). We expect a wait-and-see stance on
FCVs until 2020.

We can forget about hybrids, which are well-established in the
market right now and aren't going anywhere. They may plateau in
terms of growth, however. The good old gas-burning engine is at
this point a technology that's close to being perfected.
Understandable, as car makers have been improving it for a
century.

There are potential technological breakthroughs on the horizon,
however, which would radically improve fuel economy. Like,
hundreds of miles per gallon, using ordinary gas. If this
happens, the picture for alternative propulsion tech changes
radically, because gas is still the most economical and efficient
way to power vehicles. This is the biggest threat to Goldman's
2025 outlook, although the analysts acknowledge it. The economics
of electric cars and to a degree hydrogen collapse in the face of
ultra-high-MPG gas/diesel vehicles, which could make up
100% of the global 2025 fleet. These are going to get
better.via
YouTube

2. Autos on a severe diet: A 50 kg drop in
vehicle weight cuts CO2 emission volume by 1g per km. Despite
efforts by vehicle makers, vehicle weight is trending up. The
amount of reinforcement materials needed to meet collision safety
standards is rising. For the next 10 years, we expect greater use
of aluminum and high-tensile steel to be the main weight
reduction measures. Carbon fiber reinforced plastic (CFRP) could
be used in the future. According to the GS global steel research
team, global steelmakers had EBIT of around US$25 bn from carbon
steel in 2014 (we estimate auto-use steel accounted for around
20%-30%).

In the industry, this trend is known as "lightweighting." It's
here to stay and scheduled to be a driving force for innovation
over the next two decades. Regardless of what happens with the
overall design and safety engineering of vehicles, which globally
are getting larger as emerging markets take to trucks and SUVs,
lighter materials are going to become more prevalent. However,
initially we may see this primarily in the developed world, where
customers can afford a certain premium for aluminum and
composites. In developing markets, steel should stick around.
Expect to see more carbon
fiber in cars.Alex Davies / Business
Insider

3. Autonomous driving on horizon: Google
wants to realize Level 4 vehicle automation or full self-driving
by 2017. Most automakers are focusing on Level 3. There are many
hurdles to be overcome, including the Vienna Convention and
compensation rules in the event of accidents. We believe
preventive safety technologies will become standard before 2020
and Level 4 automation will be slower to take hold because of the
numerous unknowns over liability and regulations. Preventive
safety success will depend on how reasonably devices can be
priced.

This one is spot-on. In fact, automakers are getting so good at
semi-autonomous driving features, such as lane-change warning and
adaptive cruise control, that we may see a sort of convergence
and rapid improvement of everything that's already out there,
leading to "Level 3.5" automation that, while not as impressive
as Google-Car Level 4, will be "good enough."

Google has started at the finish line — a fully autonomous car
that's highly self-aware of its location due to complicated,
detailed maps integrated with sophisticated sensors and radars —
and is working it way back to the race. Meanwhile, traditional
automakers and new arrivals, like Tesla, are taking an additive
approach, steadily improving the self-driving stuff that's
already legal. They can apply these technologies in the real
world and prepare for a big leap.

Google, by contrast, has to get
everything right with its Utopian vision in order to pass
regulatory muster. That said, a true Level 4 car would be
extremely cheap, given that it wouldn't need much in the way of
safety technology and could thus be very lightweight. So hidden
in Goldman's prediction is a potentially dramatic reduction in
the cost of vehicular mobility. It can drive itself!Getty
Images

4. Power shift to mega
suppliers: We estimate that meeting CO2 emission volume
regulations will cost automakers US$2,500 per vehicle or US$25bn
in total (global automakers generated EBIT of around US$120bn in
2014). This represents a business opportunity for component
makers that improve the environmental credentials of vehicles. We
expect the presence of mega suppliers to expand as more alliances
are formed to reduce upfront cost burdens.

Goldman is narrowcasting here
by focusing on the CO2 front, but the overall assessment is
prescient. The global auto industry currently runs on a "just in
time" lean-manufacturing model, so assuring an abundant and ready
supply of parts is critical. This should drive plenty of future
consolidation and M&A activity in the supply chain.Supply chains will consolidate.Stringer/Reuters

5. New entrants
afoot: The appearance of autonomous driving and EVs is
removing auto business entry barriers. Technology companies,
including Google and Apple, are showing interest in the auto
business. However, outsiders still face many difficult business
hurdles, including production system, collision safety, and
dealer network issues.

Nope. There are really three
things going on when it comes to "new" car companies. First,
Tesla is trying to validate a high-end electric vehicle model.
But the vast majority of the auto industry is and will continue
producing gas-powered cars. Second, Google is pioneering a
entirely new model of mobility: the Google Car is designed to be
an autonomous, self-aware, networked node in a mobility matrix.
It points strongly toward a bet on de-ownership of personal
transportation. Third, Apple is likely aiming to improve the
user-interface of the automobile; Apple typically takes existing
technology and Apple-izes it. This is largely a design problem,
but Apple could be building some type of actual vehicle to use as
a test platform.

So, actually, we only have one
meaningful new entrant, Tesla. Obviously, other newish entrants
may emerge — a big question is whether Chinese automakers will
ever see a need to export, given the massive potential size of
their domestic market. But non-traditional disruptors in the
industry have not, and really never, fared well.Tesla is only new car company to establish
itself.Bill Pugliano/Getty
Images

6. Connected cars and
shared mobility: The use of vehicle position information
and running data is likely to increase car share. Vehicle
utilization is less than 5% and ownership costs are high. In
Shanghai, for example, it costs US$12,000 to acquire a license
plate. Connected cars could lead to changes in business models
adopted by insurers (which rely on auto insurance for about 30%
of revenues).

Nope. Car sharing works up to a
point, in highly urbanized environments where ownership doesn't
make financial sense. Car sharing also works for people who are
new to the labor markets and low down the income ladder. But for
most of the developed world and increasingly much of the
developing world, convenience trumps sharing.

The great thing about owning a
car is that you can jump into it and go someplace on a moment's
notice, no tech required. Ultra-cheap cars make the ownership
case even more appealing. Additionally, the entire auto industry
is build on a credit model — car makers don't sell cars, they
sell car loans — and de-ownership would undermine an important
source of capital for a capital-intensive business.Sorry, people still want to own
cars.Mario Tama/Getty
Images

7. Shift to emerging
markets: Motorization in emerging markets continues
unabated. By 2025, we expect China to have 35 mn vehicles and
India 7.4 mn vehicles. Automakers must offer affordable cars that
will sell and be profitable, but we see scope for a shift to
larger and higher-end vehicles. Amid increasing concern about CO2
emissions, the ability to offer affordable fuel economy
technologies will be a major focal point even in various emerging
markets.

A bit of a wildcard. China is
set to be huge market, but its unclear whether it will be an
efficient and competitive market. So far, it's Western automakers
that have benefitted most from Chinese motorization, through
joint ventures with Chinese car companies. A looming problem for
the Chinese market is an excessive number of manufacturers
competing for market share in a market that's centrally
managed.

Contrast this with the US
market, which is the best in the world right now, even though it
will top out at half the size of the Chinese market by 2025
(17-18 million new cars sold annually, versus 35 million in
China).

When it's operating correctly
(i.e., not in a depression), the US market is well-oiled
money-generating machine and a powerful engine for innovation,
due to the shared stake that the government and citizens have in
a healthy environment. Transparent credit flows, a relatively
coherent method to execute recalls, and an abundance of
established marketing channels as well as a robust automotive
media also mean that it's easy, if not inexpensive, for
automakers to connect with customers and sell the
vehicles.The US auto market is the world's best, if not
biggest.Scott Olson / Getty
Images

Additionally, an Indian market
of 7.5 million is not all that great. Mobility in that country
isn't shifting as decisively toward traditional cars, trucks, and
SUVs as it is in China. Scooters, motorcycles, and mopeds remain
popular. Plus, unlike in China where the luxury market is making
a greater contribution, India is developing a reputation for
providing basic mobility at very lower prices. Pursue that model,
and you have sell A LOT of cars to make real money (for an
historical example, see Volkswagen and the original
Beetle).

So the bottom line is that
Goldman's analysts have nailed it with three out of seven
megatrends. The other four, however, are up for considerable
debate.